Working Paper #573
How Rising Housing Prices Have Stimulated U.S. Consumption
Anthony Downs
Equity Market Housing & Residential Mortgages
A flood of financial capital into real estate markets after 1997—for both housing and commercial properties—greatly affected property prices and the wealth of U.S. homeowners. Housing prices rose sharply and interest rates fell, especially after 2000, increasing homeowners’ net equities, and made borrowing against those equities easier. Millions of homeowners “cashed in” some of their increased equities to finance greater consumption. This sustained a U.S. economic boom. Since mortgage rates have risen, such “cashing in” will decline in 2006 and beyond, also slowing U.S. overall economic growth. However, there will be no “bursting of a housing bubble” in the overall housing market.